Sunday, March 29, 2009

Fool's Gold

Multiple Choice, Fool's Gold is:

A. The mineral pyrite
B. Perhaps the 3rd worst movie ever made, starring Matthew McConaughey shirtless and with a bad perm in every scene, behind only the two post-apocalyptic Kevin Costner movies, The Postman and Waterworld
C. The recent 23% rally in stocks largely based on Geithner's probably illegal/unconstitutional TALF extenison to leverage govt. money into hedge fund loans
D. All of the above

D is correct. Lest we forget, this rally has buoyed world stocks, and this even puts European losers like EWU and VGK back on the table as potential shorts. We still face two short-term headwinds. The return of the uptick rule and the possible initial success of the public-private partnership in dumping toxic-assets. Markman puts a six-week window on this charade, with the best of the worst going quickly, leaving a big pile of junk that no one will touch even with 9-1 leverage from the government. So keep some cash ready. TM approaches $70, and banks have rallied like crazy. April should get very interesting.

Thursday, March 26, 2009

Are We Really This Dumb?

Our government, still reeling from the multiple failures of its bailout plans and scandals, has come up with even more preposterous ways to rip off the American taxpayer. My thought is that they think we're dumb enough to be scared by the "toxic assets" that have caused all the problems, and when they're retired, banks will just resume their function as huge cash generators paying us their largess in dividend form. If you think Geithner and Bernanke haven't spent every waking moment devising a scheme to allow banks to not take the writedown on these things, you're crazy. Please read any or all of the following articles which explain how banks, hedge funds, and private equity will all reap huge rewards under the partnership while we will get stuck with the spread at a huge loss. I'll throw in a quote to get you acquainted with some of the principles at work:

Posted by Tyler Durden at 2:14 AM
The greatest bait and switch of this generation in all its visual splendor. As a result of the TALF's non-recourse nature, a hedge fund X can buy Bank X's MBS Portfolio which is marked on the bank's books at 80 cents on the dollar (but has a market price of 20 cents) for the marked price with a 3% equity check and TALF filling the balance. A day later, Bank X repurchases the portfolio from hedge fund X at the 20 cent market price, pays a $5 million fee for the "trouble" and waits for the portfolio to appreciate to 50 cents on the dollar by 2014. Hedge fund X takes a 75% loss on its nominal equity stake but more than makes up in transaction fees. The TALF portion takes a 75% loss with no recourse and no margin to fall back on. As a result Bank X takes no writedown now, and in 5 years may book an equity profit of as much as $25 million (net of transaction fees paid to the Hedge Fund X), while Hedge Fund X books a profit of $3.2 million for one day's work...Lastly the U.S. taxpayer loses $54.3 million on a $77.6 million TALF Investment, or 70% (net of 5 years of interest income).Note: the maximum TALF size is $1 trillion. Will U.S. taxpayers suffer $700 billion in losses from the TALF? Ask your congressman.

Even more disturbing perhaps, is The New York Post reporting that Bank of America and other should've been nationalized banks are actually already purchasing more of the toxic assets they already own, knowing the government will be forced to give them above market prices through this partnership.

But the market is loving it. 4th quarter GDP was the worst since the 1930s. The NYT and Washington Post have slashed salaries and promised layoffs. WSM, a former short, has lost 90% of its profits. Even Google is laying people off! Japan, the world's second largest economy, reported a 50% decrease in exports. And the WSJ is reporting that CRE defaults will also hit all-time highs.."the default rates on the $700 billion of commercial-mortgage-backed securities could hit at least 30%, and loss rates, which figure in the amounts recovered by lenders, could reach more than 10%, the peak seen in the early 1990s.Besides securities backed by commercial real-estate loans, about $524.5 billion of whole commercial mortgages held by U.S. banks and thrifts are expected to come due between this year and 2012. Nearly 50% wouldn't qualify for refinancing in a tight credit environment, as they exceed 90% of the property's value, estimates Matthew Anderson, partner at Foresight Analytics. Today, lenders generally won't loan over 65% of a commercial property's value."

So, I'm removing my own self-imposed ban quickly as we're likely to hit Dow 8K, maybe even tomorrow. Feel free to plunge into SRS, DXD, or any double inverse fund that will shine when this charade ends quickly. Perhaps it will be the Chinese selling bonds, perhaps Kim Jong-Il fires up a rocket, or perhaps with Build-a-Bear over $6, it's just the right thing to do.

Saturday, March 21, 2009

Legacy=Old Junk

"Broadening the TALF to include older, illiquid and lower- rated securities... " The rhetoric and misdirection will be in full force come Monday or Tuesday as Geithner and clones reveal an expansion of the TALF to purchase, among other things, "legacy assets." What the hell are these things? Good question. These are assets so old (mostly 2005 and 2006) and worthless that they make the MBS assets look good.

What should bother us about these purchases in addition to the rampant increase in money supply is, how the hell are we ever going to get rid of them. Our government is creating an artificial market for these bad assets. When inflation (super, hyper, or otherwise) kicks in, we usually try to reign it in by selling treasuries and other assets. Some estimates have us increasing our money supply 15-fold in the next few years. To retire that debt, we'll have to sell these products and that ain't happening.

For all of the talk about deflation, it was interesting to see the $70 one-day spike in gold and the resurgence in oil above $50 on Ben's announcement. He's been wrong, both in theory and in practice, about everything so far. So when he asserts that inflation is an easily reversible process, I'm more than a bit skeptical.

So let's see where Geithner's big pitch takes us next week. My guess is the market's will celebrate and re-reward the 400 points they took away from him last time. I would expect commodities to continue to rise under this surge in money, however.

Wednesday, March 18, 2009

Right and Wrong

It's good to be right even when you're wrong. The opposite is not true. Let me give you some examples from our recent trading past. Not long after a bear-market rally of the time, we shorted 3 stocks, Darden, Cheesecake, and Williams-Sonoma. All 3 produced 200% returns in a matter of weeks as we got out near the Nov. bottom. Darden was shorted at around $25 as it had been on our list since trading near $33 over the summer. It plunged to $13 shortly thereafter. Today it is back up to $34 on reports that it's not doing as well, but still selling plenty of breadsticks and unlimited pasta at the Olive Garden. I was wrong in my assessment versus the other 2 losers, just the beneficiary of good market timing.

The opposite has been true with Ryland. Shorted near $20, this stock has plunged below $10 once and to $12 2 weeks ago. However, despite this massive drop and correct call, our puts were still out of the money the 2nd time around. And with Bernanke changing his tune from just 3 days ago on 60 minutes and now buying over a trillion in new debt (including $750 billion in MBS), there is optimism that homebuilders will rise again. We can only take solace in that our hedge against such idiocy, gold, has gone up $40 in the last 30 minutes, improving our calls by 35% over that time.

So, in this brief time frame of ever changing rules, including the potential for the return of the dreaded "uptick rule," I'm suspending my search for shorts ver temporarily (unless Toyota hits $70). Despite Steven Sears of Barron's asserting puts are getting cheap again, I think this bear-rally might persist long enough to leave you naked if you short now.

But has anything changed for the better? Oh no. As John Markman points out "Let's get the facts straight: The bear market has not been about panic or psychology; it's been about plunging demand and the death of credit securitization. Neither shows any signs of improving in the next six months. Retail sales for 2008 were off 10.4%, a plunge equaled in the past 60 years only by July 1951, according to analyst Philippa Dunne. In February, just 6% of respondents in Dunne's monthly survey of state officials hit their targets for sales-tax collections, down from 21% in January. Said one official: "I have been doing this 25 years, and I never thought I would see broadly and consistently declining sales-tax receipts."

And the recent rally in REITs? "More than 200,000 store closures are projected for this year by Howard Davidowitz, chairman of New York-based retail consulting and investment banking firm Davidowitz & Associates Inc. “Thousands of shopping centers will close,” Davidowitz said in an interview. “It’s a debacle.”

I have to run now to check on my gold calls, I mean, you can't keep pushing the dollar to zero without some consequences, right Ben?

Friday, March 13, 2009

We've Lost Our Way

Yes, finally Madoff has gone to jail, and Madoff-lite, Mr. Stanford will be joining him shortly. But continuing my abbreviated rant from the last post, we are witnessing all-out fraud by our government. Does anybody blink when the C-level officers use their stock options to leverage margin accounts at their own firm (yet another GS debacle)? That was this year. Last week, after Citi plunged below $1, their execs loaded up on stock. On the surface, sure, good for investor confidence. But this was Friday. On Tuesday, CEO Pandit leaks an internal memo saying that the bank has been profitable this year and those execs are rewarded with an 80% gain in 4 days. Is that not an SEC violation? What if I printed a post saying Build-a-Bear was bankrupt, what would happen? That's illegal.

The markets also responded favorably Tuesday to a quote from Bernanke saying the recession could be over by the end of the year if we stabilize the banks. Consistent with the horrible reporting standards of the MSM (nice to see Cramer's PR rep has told him to just sit there and shutup during probing interviews), the left out Bernanke's next statement. ""My forecasting record is about the same as the win-loss record of the Washington Nationals." Thanks, Ben, so even though you've been wrong most of the time, you'll just keep throwing out ridiculous statements like the economy should recover in 9 months.

Obviously, the CEOs put their collective brain cell together last week and thought they'd give disinformation another run. Jamie Dimon, apparently following some sort of schedule, spewed off about how short-sellers and "the vilification of corporate America" is killing the market. Senators are again clamoring for the return of the "uptick" rule, which, by the way, comes in 3 cent increments, not penny increments like actual stocks trade. Haven't we suffered through all of this BS before? What about last summer, and then the fall, when we banned short-selling financials entirely? We've already proven that notion to be false, as have multiple studies from the NBER.

Remember Wells Fargo and a JPM last July confirming their strong dividend, GE, Berkshire? What's happened since? Dividends slashed to pennies (and that is just for show, no way in the world can these banks afford to pay dividends). BH and GE lose their AAA ratings and the markets go up. This should be the nail in the coffin, confirmation that the game is over.

Keep in mind what our government is trying to do, stimulate spending. That is their only way of propping up our economy. Don't buy in. Save, cut back, work more if it gets you more, sell or give away what you don't need. If Jim Rogers is correct that it will be the farmers driving Lamborghinis and the traders driving cabs, we're all going to have to do with a lot less.

Saturday, March 7, 2009

Government Subsidizing Hedge Funds

I'll keep this short. This to me is the ultimate proof that our government is in the business of propping up the bankers, lobbyists, and "Shadow" system of finance that has led to world economic collapse. The Washington Post reported yesterday that our gubmint is considering legislation that will allow hedge funds to receive $9 million dollars for every $1 million they invest in asset-backed securities as long as they hold them for 3 years. They reap all of the profits with maximum downside risk of $1 million dollars.

Anyone, come 2010, who votes for the criminals who back this proposal deserves what they get. Frank, Dodd, Walters, that dude from Baltimore, Cummings, who had to ask Paulson and Bernanke to explain to him what finance was, these are our leaders. If you can't see that these people have formed what Dr. Hudson has referred to as a new oligarchy, then you are blind. Stop spending. Save your money. If unemployment continues to multiply at this rate, the Dow will be in the 5,000s with no reason for it to go forward.

Thursday, March 5, 2009

You Should Be Buying Stocks

No, that's not Crammer on his daily whine but your new President, Barack Obama, stating quite the opposite of the obvious. Translation-We're screwed, and if I have any shot at a second term I need the market to go up and fast! For our President to be making such statements is really unethical, calling on us to burn through even more of our hard earned money. If the last 18 months have not taught us that our leaders, both financial and political, have not a clue, then we haven't learned a single thing.

Show me one chart that led to this conclusion, a 55% drop in the Dow. Look at the headline numbers on Marketwatch comparing stock prices from just a year ago. GE at $38, GM at $22, BAC and Citi in the $20s. And now, literally penny stocks. I steered this ship astray when I recommended giving Citi a go at $8 as a hedge against a fally. It's only a matter of time before nationalization takes what's left of shareholder value and I apologize.

But at the same time I foresaw continued destruction. Just last week the bet of the day said Dow 6,500 before 9K and, uh, here we are. Gannett has fallen to $2 from $7.50. MCRI, as Tiger Coach and I both held our breath for expiring puts, has fallen from $10 to $4 in just 2 weeks, sending our March puts from 50% negative territory to triple-digit gain territory in that time. We have both recommended going again given MGM's nightmare and shorting MCRI to 0 with a June time frame. SKS under $2, NYT under $4.....and European index funds have been destroyed. I first recommended shorting the DJ Euro 50 via the VGK when it was at $64 a few months ago, now, $27.

And yet everyday, a call for the bottom. And where will that come from? Nobody can qualify to refinance their mortgage. Layoffs tomorrow might be the worst in 60 years. The government is pushing stimulus to encourage more spending of all things, but, as John Markman points out, if the savings rate hits 10%, earnings could be cut 50%, leaving the Dow in Itulipville around 5300 (and gold through the roof not coincidentally).

So where does that leave us? I'm thinking about cars and oil. Cars bad. What's left at the top should be shorted. That means Toyota and Honda, possibly Daimler (but puts are very expensive). No market for these things. I've read several articles talking about how Toyota has had to lease cargo and empty lot space just to store all of their unsold cars. Even if a GM bankruptcy is imminent, I don't think the resulting collapse of suppliers and jobs will be good for business. Oil? Only a matter of time. Perhaps time, that is, to roll the dice with DXO and a 2-5 year time frame. If oil hits $60, you win. If it hits $100, you really win. If it hits $200, jackpot. Also, I'm pretty sure it can't go to 0, so with the DXO trading at $2, it's worth a thought.